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Chapter 23

Economics 102: Chapter 23

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Department
Economics
Course
ECON 102
Professor
Robert Gateman
Semester
Winter

Description
Economics 102: Principles of Macroeconomics Chapter 23 23.1 The Demand Side of the Economy Exogenous Changes in the Price Level:  The AE curve shifts as a change in price level affects desired consumption expenditure and net exports Changes in Consumption:  The relationship between the price level and desired consumption is related to changes in the price level that lead to changes in household wealth, and changes in desired spending  A rise in the price level lowers the real value of money held by the private sector  A fall in the price level raises the real value of money help by the private sector  Changes in the price level change the wealth of bondholders and bond issuers o The changes offset each other, therefore there is no change in aggregate wealth  A reduction in wealth leads to a decrease in autonomous desired consumption, shift down of AE function Changes in Net Exports:  When the domestic price level rises, exchange rate held constant, domestic goods are more expensive relative to the foreign goods o Shifts the net export function downward, and a downward shift in the AE curve  Fall in the domestic price level shifts the net export function upward and the AE curve upward Changes in Equilibrium GDP:  An exogenous rise in the price level causes a downward shift in the AE curve o When the AE curve shifts downward, the equilibrium level of real GDP falls  Fall in the price level, Canadian goods become relatively cheaper internationally, net exports rise o Purchasing power of nominal assets increases, therefore households spend more o Desired expenditure on Canadian goods will increase, and the AE curve shifts up o The equilibrium level of real GDP rises  Horizontal axis is real GDP rather than national income, but they have the same meaning o Real GDP to distinguish between nominal and real GDP with prices changing The Aggregate Demand Curve:  AE curve: real GDP on the horizontal axis, desired aggregate expenditure on the vertical axis  Aggregate demand curve (AD): shows combinations of real GDP and the price level that make desired aggregate expenditure equal to actual national income  Shows the relationship between the price level and the equilibrium level of GDP o Price level is the vertical axis, and real GDP on the horizontal axis  The AE and the AD curves can be compared on the same graph as the horizontal axis are the same Economics 102: Principles of Macroeconomics  For any price level, the AD curve shows the level of real GDP where desired aggregate expenditure is equal to actual GDP The AD Curve is not a Micro Demand Curve:  A rise in the price level causes the AE curve to shift downward o Leads to a movement upward and to the left along the AD curve o Causes a fall in the equilibrium level of GDP  A fall in the price level causes the AE curve to shift upward o Leads to a movement downward and to the right along the AD curve o Creates a rise in the equilibrium level of GDP  A change in price level down not change the relative prices of domestic goods o This does not cause consumers to substitute between different goods  A change in domestic price level does lead to a change in international relative prices o Some substitution between domestic and foreign products  Fall in the price level leads to a rise in private sector wealth o This increases desired consumption and leads to an increase in equilibrium GDP  A fall in the price level (for a given exchange rate) leads to an rise in net exports o This leads to an increase in equilibrium GDP Shifts in the AD Curve:  For a given price level, any even that leads to a change in equilibrium GDP will shift the AD curve o Could be from a change in policy (purchases, taxation, interest rates etc.) o Could be from change in household's consumption expenditure, firms' investment behaviour or foreigner's demand for Canadian exports  Anything that alters equilibrium GDP at a given price level will shift the AD curve  Any change, other than a change in the price level, that causes the AE curve to shift will also cause the AD curve to shift  Aggregate demand shock: any shift in the aggregate demand curve  An increase in autonomous aggregate expenditure shift the AE curve up and the AD curve to the right  A fall in autonomous aggregate expenditure shift the AE curve downward and the AD curve to the left  In order to shift the AD curve, the change in autonomous expenditure must be cause by something other than a change in the domestic price level The Simple Multiplier and the AD Curve:  Multiplier gives the size of the horizontal shift in the AD curve in response to autonomous expenditure  If the price level remains constant and producers supply everything that is demanded at the price level, the simple multiplier will show the change in equilibrium income in response to autonomous expenditure 23.2 The Supply Side of the Economy The Aggregate Supply Curve: Economics 102: Principles of Macroeconomics  Aggregate supply: the total output of goods/services that firms would like to produce  Aggregate supply curve (AS): relates the price level to the quantity of output that firms would like to produce/sell on the assumption that technology and the prices of all factors of production remain cons
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